Buyers, sellers should weigh options before making or accepting contingencies

MINNEAPOLIS — Amy Hyatt-Blat heard the horror stories of homebuyers who ended up paying mortgages on two houses, and wanted to avoid that when she decided to buy a bigger house. So when she made a full-price offer on a town house in south Minneapolis, the proposal was rejected.

The deal breaker? Her offer was contingent on selling her condo. She and her husband tried again by making a full-price offer on another Minneapolis town house, and while this offer was still contingent upon them selling their condo, they sweetened the deal by offering to lower the price on the condo to show the seller they were serious about selling.

Their strategy worked. Three months later, their condo sold and they have no regrets.

"There are so many things that are out of your control," Hyatt-Blat said. "But one thing you do have control over is whether or not you choose to gamble on how long your place will be on the market."

Contingencies have become a way of life for buyers and sellers in today's challenging housing market. Buyers don't want to take a chance getting stuck with two mortgages, and eager sellers are more willing to accept any offer, even if it includes a contingency.

Contingencies, however, are a gray area in the negotiating process, so both buyers and sellers should weigh their options before making or accepting them.

"Be very cautious and thoughtful about offers that are contingent," warned Faith McGown, a Minnesota real-estate agent with Coldwell Banker Burnet.

During the strong sellers' market of recent years, contingencies were rare because buyers were confident they could sell before closing on their next home.

They're still not the norm in the Seattle area, said Paula Fortier, managing broker of Coldwell Banker Bain's Bellevue Way office.

Fortier estimates 80 percent of local repeat buyers sell their home before plunging in again. Twenty percent make the purchase of their next place contingent on selling their present one.

Contingencies can be a conundrum for sellers. Real-estate agent Steve Fiorella has a client who recently rejected an offer contingent on the sale of the buyer's northern Minnesota home. Fiorella and his client checked on the property and determined that it might be a difficult sale.

Fiorella, head of the Fiorella Group in Re/Max Results' Apple Valley, Minn., office, said it's common to stake out a buyer's home. "First and foremost, you want to make sure that the buyer of your home is marketing their home aggressively and pricing it accurately," he said.

McGown said it can be a smart move for buyers to make a full-price offer to make up for the contingency. To Fiorella, it's even better to offer more earnest money with a portion of it nonrefundable. "Additional earnest money will show that you're into making things happen," he said.

That said, each potential transaction should be analyzed on its own merits.

Some Western Washington sellers may agree to both a contingency and a small price cut, Fortier said.

"It depends on how long the property has been on the market and where it is," she explained. "If it's a rural property far out, you'll have more opportunity to do that than if it's in west Bellevue."

Contingencies can be confusing, stressful and complicated. Usually, there are many variables, such as the potential of another buyer making a better offer and how comfortable the seller is with the buyer's ability to sell their home.

That's why McGown generally discourages buyers from making them.

"Get your house sold first, then make an offer. You have so much bargaining power when your house is sold and you're going in noncontingent," she said. "You need to sell your house before you can buy the new one anyway."

Strategy aside, Fortier said the Seattle real-estate market is healthy enough that it's not necessary for buyers to sell their present home first — even when a contingency time frame is short. Around here right now they're usually 30 days.

That's often enough time. "If something is priced correctly it sells," she said.

Still "contingencies are all about risk," Fortier cautioned, and a buyer can end up owning two homes at once.

Some homeowners in this situation decide to rent their old home out for a while.

Others get loans to tide them over until that property sells.

"We used to see a lot of bridge financing," she said. "Now if a buyer has any equity in their house they're far more likely to get a line of credit on their house. Then when it sells they pay off the line of credit and their mortgage."

Contingencies can be a headache for developers, too.

Most lenders won't count contingent offers as a legitimate purchase agreement, which is used to determine what the bank will set the interest rate at and when construction can begin.

"Contingencies have gone from being something of a nuisance to being a deal breaker for a lot of sellers," said Scott Parkin, marketing director for S.R. Hoffman & Associates in Minneapolis, which handles marketing for several condominium projects.

"They know that when someone has a home to sell, it's a crapshoot if that home is going to sell in any reasonable time in this market."

Parkin said some developers are even targeting buyers who are unlikely to make a contingent offer.

"If you can bombard an apartment building with fliers about your new construction project, those renters won't need contingencies." Parkin said. "In this market, offers without contingencies are golden."

While contingencies can complicate a deal, they can also motivate buyers.

Hyatt-Blat, for example, lowered the price on the condo she was trying to sell, hung color notices in coffee shops and at work, sent out personal invites and kept her condo in showing condition for three months until it sold.

"I was tempted (to make a noncontingent offer)," Hyatt-Blat said.

"But what I wanted more than that town home was peace of mind. It's better to lose a place and wait than to roll the dice and gamble taking on a second mortgage."

Seattle Times business reporter Elizabeth Rhodes contributed to this report.